Go beyond the traditional monthly fee and adopt pay per result as a new model to leverage your business.
According to the Panorama of Digital Agencies, only 8% of agencies adopt the Success like Blue World City, Fee pricing model. But why is this membership so low? Above all, because of the risk involved in this type of remuneration. By adopting this model, your agency becomes a hostage (along with the client) of the results of the projects and services offered.
But the truth is that, despite the risks, the Success Fee model can be an interesting complement to your agency’s remuneration. In this article, I’ll explain you why. You’ll also see important tips for adopting this strategy and when to consider it.
But, after all, what is success fee?
With the growing search for Inbound Marketing in Brazil and more and more agencies providing the methodology to their clients, the remuneration model can be one of its differentials. Yes, the time has come for you to go beyond the traditional monthly fee.
Compensation by result is a percentage charged, during a period, on the performance of a project or service implemented to the client, in order to remunerate the risk assumed by the agency or consultancy.
It is often used as a complement to a service delivery model. For example: fixed fee + success fee, based on pre-established goals in the contract.
Why should you consider success fees in your compensation model?
Some of the most recurrent objections I hear from agencies are:
- “My client does not have digital maturity for the success fee”
- “I can’t price a variable in the contract that I don’t have control of”
- “ The client liked it, but wants a 100% success fee project”
All these questions are valid when closing a client with a contract involving variable remuneration. The great benefit of this model (which must be presented to the client at the time of the commercial proposal) is the “win-win” relationship.
Imagine preparing an athlete to run a marathon. He starts running 5km and, as the months go by, improving his performance, conquering 42km in one race. This is your agency’s role with the client: to increase your results over time.
When you only work with the monthly fee model (fixed remuneration), it is like running at the same speed on a treadmill. You deliver value to your customer, who gets more results over time, but you keep getting the same return.
Pricing composed only of costs and scope of activities ends up distracting your customer from focusing on the value you really add and what they want most: sales and retention.
With the success fee, both commit themselves to a goal and, upon reaching it, grow together. It means taking on a challenge, agency and client, with commitment and the desire to exceed established goals.
When to use the success fee and what metrics to consider?
Although it is a compensation model with shared risk (agency and client), it does not mean that you should put all your chips in a 100% success fee proposal. After all, there is always a cost involved in serving your customer.
The ideal is to work in conjunction with another remuneration model, for example, monthly fee + success fee. This way, you guarantee that at least your operating cost is being met to put the project into progress and, based on the results obtained, your variable gain is added.
There is also a myth among agencies that this model must always be linked to the sales generated to the customer. Forget it! You can consider one of the metrics below to define your variable gain:
- Opportunities generated
- Conversion rates
To make a realistic projection of the percentage of gain on top of one of the metrics mentioned, it is extremely important that you already have a customer or segment history to support it.
Therefore, in some cases, it is worth considering a variable gain only from the sixth month on average in the contract.
How to price?
When planning a success fee proposal, the first step is to be aware of the questions below:
- How does the client’s business and remuneration model work?
- How is the current CAC (Customer Acquisition Cost) and LTV (Customer Lifecycle)?
- What is the objective and goal with the project?
- Is there a conversion history over the internet?
- What would be my minimum monthly fee to serve you?
Having this information at hand, coupled with a detailed briefing, will allow you to design an ideal funnel and divide it up months to show the client a gradual growth, for example, 10% per month. With a scope of monthly activities that also meets the project’s expectations, you’ll know the minimum price to serve this client.
From there, in line with the client’s goals, start variable pricing:
1. Success fee per sale
Used when the agency has control and monitoring of the final conversion of opportunities into sales. It usually serves customers in the ecommerce, online education, events and tourism segment.
Imagine a virtual shoe store with the following scenario:
Monthly sales volume: 300 pairs
Average ticket: BRL 200
Average monthly billing: BRL 60 thousand
Goal: Double the sales volume in one year to 600 pairs and R$ 120 thousand monthly
Project a gradual growth to reach the desired volume in the twelfth month. In this case, a recurrent growth of 6.5% from the second month makes the goal achievable. For your participation, you can set a fixed percentage or create 3 scenarios:
Up to 400 pairs sold = 1.5% success fee on sales
From 400 to 600 pairs sold = 2% success fee on sales
From 600 pairs sold = 2.5% success fee on sales
The percentages of 1.5%, 2% and 2.5% depend heavily on the customer’s average ticket and available margin. There is no specific rule, but something that must be aligned with your customer.
2. Success fee per generated opportunity
It is most suitable when the agency does not have control over the final sale. It serves customers who have a commercial team and need a volume of opportunities to achieve their goals. As an example, we can mention the segments of industry, real estate, technology and services in general.
To project variable gain, you need to have a history of how many leads need to be generated for the customer to close a sale. It is important to consider only Qualified Leads by Sales (SQL), which have the minimum prerequisites necessary to evolve in the sales process.
Imagine a real estate agency with the following scenario:
- For every 10 SQLs, the commercial team closes 1 tenant per month with an average ticket of R$ 1 thousand (rent);
- This customer signs a 12-month contract and has a 2-year relationship cycle with the company;
- Therefore, each customer has invested around R$ 24 thousand throughout the company’s life cycle (average ticket X number of rents per year X average years of relationship);
- Currently, the real estate agency invests around R$5,000 in marketing to close an average of 10 clients per month. This means that the cost of acquiring a customer through marketing is R$500.
CAC = Sum of investments in Marketing and Sales/Number of customers acquired
- If for every 10 opportunities generated for sales (SQLs) 1 tenant is closed, it is known that each opportunity has a cost of R$ 50 (CAC/Volume of opportunities in the period);
- At the same time, if each customer’s LTV is R$24K for every 10 SQLs, it follows that the value of each opportunity is R$2.4K;
- Thus, when it comes to investment in marketing, real estate agents pay R$50 per opportunity, which generates an average return of R$2.4 thousand, 48 times more.
On top of this data, you can suggest to the customer a fixed amount per opportunity generated to the sales team, always taking into account M-CAC and LTV for realistic business growth.
3. Success fee per conversion fee
This pricing is ideal when the customer’s goal is to find optimization opportunities in their online marketing and sales funnel in order to identify the main bottlenecks and further leverage their results.
Imagine the current scenario below a school of vocational courses:
Monthly visitors to the site: 40 thousand
Monthly sales: 110 courses
Average ticket: BRL 600
Average monthly billing: BRL 66 thousand
Percentage between monthly sales vs. monthly visitors: 0.275%
From goals to increase conversion rate, you can also design 3 scenarios:
Target: increase to 0.30% between monthly sales vs. monthly visitors
Expected result: 120 monthly sales and BRL 72,000 in sales (an increase of 9%)
Success Fee: 2% on new sales/monthly = R$ 120
Target: increase to 0.45% between monthly sales vs. monthly visitors
Expected result: 180 monthly sales and BRL 108,000 in sales (63%)
Success fee: 3% on new sales/monthly = R$1,260
Target: increase to 0.65% between monthly sales vs. monthly visitors
Expected result: 260 monthly sales and R$ 156,000 in sales (an increase of 136%)
Success Fee: 4% on new sales/monthly = R$ 3,600
Set deadlines to achieve the above goals within a 12-month contract, aligning with the client your variable participation on the results delivered throughout the project. Regarding the percentage of participation, once again take into account the average ticket, acquisition cost (CAC) and the value of the customer’s life cycle (LTV).
When it comes to a success fee, understanding your customer’s M-CAC and LTV will help you determine:
- How much a new customer is worth to the company;
- How effective is your marketing investment being;
- Whether you are investing too little or too much in marketing for desired growth.
The best path in this remuneration model is transparency. Bringing these metrics to the table and discussing these metrics demonstrates the value you are bringing to the business from the start, as well as your concern to help it grow.
What you need to define now is which model fits best with your potential customers or even current ones to increase the average ticket. After all, you also need to profit!
If you use any other form of variable pricing in your agency or have any questions, please share them below!
Post published in October 2017 and updated in March 2020.